6.1. Introduction - FTMS

International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business

Notes compiled by Zubair [email protected] or [email protected] 1

6.1. Introduction

This chapter covers one major components of learning objectives/outcomes that are

likely to examine via coursework or examination. This chapter will enable students to

build their knowledge on external influences on international business, such as the

ethical and ecological frameworks.

This chapter will cover the following topics:

Business ethics

Ethics and the corporate culture

Different ethical positions

International business ethics

International efforts to improve business ethics

Ecological/environmental issues

Global warming, ‘carbon footprint’ and tradable permits

6.2. Business Ethics

Some of the controversy about whether ethics can or should be taught may stem from

disagreement about what we mean by ethics. Ethics can be defined as “a set of moral

principles or values,” a definition that portrays ethics as highly personal and relative.

But the definition of ethics—the principles, norms, and standards of conduct

governing an individual or group—focuses on conduct. In here we expect employers

to establish guidelines for work-related conduct, including what time to arrive and

leave the workplace, whether smoking is allowed on the premises, how customers are

to be treated, and how quickly work should be done. Guidelines about ethical conduct

aren’t much different. Many employers spend a lot of time and money developing

policies for a range of employee activities, from how to fill out expense reports to

what kind of client gifts are acceptable, to what constitutes a conflict of interest or

bribe. If we use this definition, ethics becomes an extension of good management.

Leaders identify appropriate and inappropriate conduct, and they communicate their

expectations to employees through ethics codes, training programs, and other

communication channels.

In most cases, individual employees will agree with their company’s expectations and

policies. For example, who would disagree that it’s wrong to steal company property,

lie to customers, dump cancerous chemicals in the local stream, or comply with

regulations on defense contracts? At times, however, an employee may find the

organization’s standards inconsistent with his or her own moral values or principles.

For example, a highly religious employee of a health maintenance organization may

object to offering abortion as an alternative when providing genetic counseling to

pregnant women. Or a highly devoted environmentalist may believe that his or her

organization should go beyond the minimum standards of environmental law when

making decisions about how much to spend on new technology or on environmental

cleanup efforts. These individuals may be able to influence their employers’ policies.



Otherwise, the person’s only recourse may be to leave the organization for one that is

a better values match.

Figure 6.1: Ethical decision making

Source: Interlocution to business. Available from:

http://media.wiley.com/product_data/excerpt/45/04712305/0471230545.pdf

According to Collins and Porras (1994, cited in Wall et al, 2010), the best companies

(long lasting and most profitable) are those that do not focus on profitability as their

primary mission. In their ranking, the highest performing corporation tendered to be

those that were governed by core beliefs, which transcended purely economic

pursuits, seeking rather to produce the finest products in the marketplace, to win

customer satisfaction, to serve employees and so on. Such findings are contrary to

much of the theory taught in most of the business schools.

6.3. Ethics and corporate culture

Organisation need certain ‘ways of acting or being’ (which can either explicit or

implicit) as a guide to ‘acceptable’ behaviour by members of organisation.

There are many ethical implication, which some parallels in international business.

Beyer and Nino pick out the following parallels.

Doing unto others as you would have them do unto you would be suicide in

business. Such attitudes encourage people to set for themselves self-interested

(organisational goals) and to pursue them relentlessly with little concerns for

their effects on others. Some forms of winning in business (getting a new

product to market, achieving assigned targets, taking over another firm) can

overwhelm broader based ethical principles.

If the group had no prior experience or models for jointly arriving at a

consensus about what to do. They came from four different cultures and

lacked a commonality of mutually accepted values that would give them

guidance as to what to do. Each group passed the problem on to the other

group. There was no strong culture to glue their actions together. This ‘buck-

passing’ between departments and multinational divisions is hardly unknown.

http://media.wiley.com/product_data/excerpt/45/04712305/0471230545.pdf



If there is a failure to act which then itself become the decision. This can often

happen in business, especially when something has been going on for some

time. The lack of guidance given to Nick Leeson, an inexperienced trader in

Singapore in 1996, is arguably one such example.

The decision makers are physically and mentally stressed and under time

pressures. It is precisely under these conditions in a hyper competitive world

that personal and corporate values are most severely tested.

Even though one of the people saw through all of these considerations as

regards his ethical responsibility, he did not get support he needed from the

others present to rescue the person in critical condition. It was beyond his

individual capacity, circumstances that often accoutres in business. Many

ethical decisions require the support of the corporate community. Ethically

sensitive and courageous individuals cannot often perform ethically without

the support of others.

6.4. Different ethical position

Actions of individuals are determined by the values people hold. Similarly individual

actions are also influences by their surroundings.

6.4.1. Corporate agency and responsibility

An organisation is neither an individual nor a total system. It is comprised of

individuals in various roles which may be authorised by the larger society to

function for specific, often narrowly defined purposes. The actions of an

organisation are often the result of collective, rather than individual decision

making.

According to Noble Prize economist Milton Friedman declared:

“There is only one social responsibility of business-

To use its resources and engage in activities designed to increase its

profits so long as it stays within the rules of the game, which is to say,

engages in open and free competition without deception or fraud”

(1970, p.126).

This doesn’t mean that ‘anything goes’. Law and common morality should

guide actions. However, the main assumption is that profit maximisation is the

core objective of business. This means we thin rationally. This means to say

that maximising self interest will lead to increase corporate profitability.



6.4.2. The principle-agent problem

According Wall et al (2010), when the organisation is managed by people

who are not owners, the principle agent problem arises. In this case principle

is the owner and agent is the one who runs and manage the business on

behalf of the principle (owner). In case of public listed companies who traded

its share in stock exchange may have many owners (shareholders) that they

must appoint board of directors to manage the organisation on behalf of

them.

The principle agent problem arises when agents (directors) pursue a different

goals that are not compatible with shareholders (owners). The diagram below

shows the principle agent relationship

Figure 6.2. Principle-agent relationship

The conflict arises is referred to as a type of principle-agent problem and

emerges when shareholders (principals) a secondary party, the managers

(agents), to perform some tasks on their behalf. In return, the principals offer

their agents some compensation (wage payment).

However, the problem arises when agents do not act on the best interest of

shareholders (principals). This may be because these agents may have

superior knowledge about the company or they may have many years of

experience in running the business in the market makes them to take decision

to pursue their interest and not profit maximisation for the shareholders.

In order to make agents work for the best interest of the shareholders

(principals), shareholders assigned auditors, link the wages and salaries to

their performance and corporate profits.



6.4.3. Social contract theory

Integrated Social Contract Theory (ISCT) suggested that there are basic

moral minimums or hypernorms that governs all social relationships on the

macro level. These might include:

1. Not causing gratuitous harm

2. Honouring contracts

3. Respecting human rights

4. Treating people and organisation fairly.

On micro level there maybe a moral ‘free space’. This means that

communities can spell out the specific norms deemed acceptable among

themselves as long as these are compatible with hypernorms.

ISCT model comprises of

1. Hypernorms: these moral minima include, for example fundamental

human rights or basic prescription common to most major religions. The

values they represent are, by definition, acceptable to all cultures and

organisation

2. Consistent norms: these values are more culturally specific than those at

the centre, but are consistent both with hypernorms and other legitimate

norms.

3. Moral Free Space: as one moves away from the centre of the circle one

finds norms that are inconsistent with at least some of the other legitimate

norms existing in other culture. Such norms often reflect strongly held

cultural beliefs, whether at the national, corporate or occupational level.

4. Illegitimate norms: These are norms that are incompatible with

hypernorms. When values or practices reach a point where they

transgress permissible limits(fundamental human rights) they fall outside

the circle and into the ‘incompatible zone is an expression of value falling

outside the circle.



6.4.4. Stakeholder theory

Stakeholder can be defined as any individual or group which can affect or be

affected by the achievement of the organisation’s objectives. Such

stakeholders might include employees, customers, suppliers, consumers etc.

Source: Czinkota, Ronkainen and Moffet (2011)

Figure 6.3: Stakeholders in the firm

There is an increasing focus by the leading organisations on their obligation

to stakeholders. Stakeholder theory challenges the position that primary

purpose of a firm is to maximise the welfare of its stakeholders (e.g.

dividens), arguing instead that the goal of any firm should be to satisfy the

aspiration of all its responsibilities because of the unique and specifically

defined relationships between a particular organisation and its stakeholders.

6.5. International business ethics

Importance of ethics in the business world is superlative and global. New trends

and issues arise on a daily basis which may create an important burden to

organizations and end-consumers. Nowadays, the need for proper ethical behavior

within organizations has become crucial to avoid possible lawsuits (Mahdavi, n.d).

The recent expansion of global business and fall of trade barriers worldwide have

further underlined the interest in the topics of ethical behavior and social

responsibility. As multinational companies expand globally and enter foreign

markets, ethical conduct of the officers and employees assume added importance

since the very cultural diversity associated with such expansion may undermine the

much shared cultural and ethical values observable in the mores homogeneous

organizations (Mahdavi, 2001). Thus, concerns about unethical behavior of



corporations in other countries, are manifested in legislations such as The Foreign

Corrupt Practices Act of 1977, and the Sarbane-Oxley Act of 2002 (Mahdavi, n.d).

“Ethics is the moral principle that individuals inject into their decision making

process and that helps temper the last outcome to conform to the norms of their

society” (Morf, 1999, p.265).

The truly global companies must come to grips with the legal and moral atmosphere

in which they operate. But above all, they need to establish an environment that

fosters ethical behavior, because in the final analysis to do otherwise cuts into their

profitability.

6.5.1. Approaches to ethical issues

According to Enderle (1995) there are four types of approaches that MNCs

might take to ethical issues

1. Foreign country type: This does not apply its own ethical norms to the

foreign country but conforms to the local customs, taking its direction

from what prevails as morality in the host country. The Swiss are often

identified with this approach to business.

In terms of ISCT, the danger with the foreign country type is that there is

nothing to limit the moral-free space of the host country culture. If the

government corruption and environmental pollution are accepted in the

host country , then the ‘foreign country’ type of approach to ethical issues

might be regarded as colluding with this unethical framework.

2. Empire type: This resembles the approach of Great Britain in India and

elsewhere before 1947. This type of company applies domestic ethical

concepts without making any serious modifications to local customs.

Empire-type companies export their values in wholesales function, and

often do so regardless of the consequences to host company or its

stakeholders.

The “empire” type sees itself as the bearer of moral truth. This means that

‘empire” type acts from fixed idea of what is wrong or right, and so will

suffocate the moral free space of the host country.

3. Interconnection Type: This regards the international sphere as differing

from the domestic sphere. Companies here do not necessarily see

themselves as protecting a national identity or ethical framework. The

notional interest becomes blurred with that of supranational. (e.g. EU)

The interconnection type is consistent with the ISCT approach by

acknowledging both universal moral limits at the micro level. While

notion of national interest is blurred, it does manage to balance moral



principles with moral free space in a way that makes it somewhat more

convincing than its three counterparts.

4. Global Type: This abstracts from all national or regional differences,

viewing the domestic sphere as entirely irrelevant; citizens of all nations

need to become more cosmopolitan. Only global citizenry senses from

this perspective.

Global type seeks to impose moral truth-namely that since only global

citizenry makes sense, the company can be impervious to ethical

differences that mark a culture’s distinctiveness. The opportunity for host

cultures to define their own versions of moral and economic truth is lost.

6.5.2. Bribery and corruption

Bribery: gifts or payments to someone to expedite government action or to

gain some business advantages

Corruption: process where entrusted power is used for private gain

Levels of corruption and bribery vary significantly around the world. Figure

6.4 shows the top seven and bottom seven countries based on the 2005

Corruption Index. The index ranks from a score of 10 (no corruption) to 0

(highly corrupt).

Source: Transparency International

Figure 6.4: Level of Corruption among different nations



Impact of Bribery and Corruption

According to Cullen et al (2010, p. 459) the impacts of bribery and

corruption include:

1. Corruption and bribery are both attracting lots of attention because of the

devastating effects on effective market functions. For instance, as

mentioned earlier, corruption often results in waste of public funds, as

only expensive and high-profile jobs get funded.

2. Some also argue that companies typically make up for bribery by

increasing the contract price by the amount of the bribe. As such, many

developing countries suffer because they are charged higher prices.

3. Many companies also routinely use poorer-quality products or materials

to cover for the bribe, thus resulting in inferior products.

4. Furthermore, corruption can result in collusion among firms, thereby

resulting in even higher prices. As such, corruption and bribery usually

result in higher public spending, lower-quality projects, undermined

competition and inefficient allocation of resources

5. Bribery can also have devastating effects on the effective political

functioning and democratic nature of the society. According to

Transparency International, corruption and bribery have the worst effects

on the “social fabric” of a society. Because of the norms supporting

corruption and bribes, most people tend to lose trust in the political

system and in politicians. As a result, there is less participation in the

democratic process. A weak democratic system supports the election of

more corrupt politicians, thereby resulting in a vicious circle

There are surprising amount of agreement to the contention that bribery is

unethical. Wall et al (2010, p.216) suggested three reasons for this ethical

perspective on bribery using the ISCT approach

1. Acceptance of bribery violates a micro-social contract specifying the

duties of agent (the bribed recipient) to the principal (the employing

body), whether the government or a private company.

2. Bribery is typically not a legitimate norm. All countries have laws against

the practice. Some countries, even where the practice is flourishing, have

draconian penalties. For example in China in 1994, the president of Great

Wall Machinery and Electronic High-Technology Industrial Group, Mr.

Shen Haifu, was executed for bribery and embezzlement offences,

despite the recorded prevalence of such practices in China.



3. Bribery may violate the hypernorms of political participation and

efficiency. For example, in 1970s, Japan bought planes from American

aircraft manufacturer, Lockheed, Prime Minister Tanaka was

subsequently found to have accepted tens of millions of dollars in bribes.

Japanese press and other sources questioned whether he was discharging

his duties correctly in the context of established norms of political

participation. He resigned shortly after the bribery revelation was made

public.

6.6. International efforts to improve business ethics

6.6.1. International agreements

Many international agreements were signed to improve business ethics. Some

of these agreements are

1. United Nations Code of Conduct for Transnational Corporations (1983)

2. Organisation for Economic Co-operation and Development Guidelines

for MNE (1976)

3. International Labour Office Tripartite Declaration of Principles

Concerning MNE and Social Policy (1977)

4. UNCTAD Code on Restrictive Business Practices (1980)

5. Multilateral Agreements on Investment (MAI)

6.6.2. Industry –specific agreements

Some of the industry specific agreements intend to improve business ethics

include:

1. International Code of Marketing of Breast-Milk Substitutes (1981). This

sought to prevent misleading information as to the merits of their products

being explicitly or implicitly given by manufacturers of breast-milk

substitutes.

2. Code of Marketing Practices of International Federation of Pharmaceutical

Manufacturers Association (1984). This seeks to ensure accurate rather

than misleading marketing of a broad range of pharmaceutical products

3. Rugmark Initiatives. This establishes a code of labour practices for

producing rugs. This is an attempt to improve labour conditions in this

industry, especially to re-strict the use of child labour. Manufacturers who

comply with this scheme’s criteria can use the rugmark label for their

products.



4. World Federation of Sporting Good Industry. This also sought to develop

a code of practice with regards to the manufacture of sportswear and

equipment.

6.6.3. Company-specific agreements

A number of company specific agreements intend to improve company

specific agreements

1. Levi Strauss and Co has been one of the pioneers in setting out labour

practices that contracting firms are expected to follow with contract

risking being terminated for breaches of these standards.

2. Reebok and Nike have responds in this way after adverse publicity on

labour market practices by suppliers

3. Mintell announced “global manufacturing principles’ in 1997 to establish

minimum labour standards in its own plants and those major

subcontractors.

6.6.4. The role of social activists

Social activities play an important role to ensure that MNCs behave ethically

while doing business. Some of the initiatives include

1. Infant Feeding Action Coalition (INFACT). This has sought to boycott

the Nestle’ Corporation as a result of its practices of selling baby formula

containing little objective nourishment to under developed countries.

After 15 years of lobbying , Nestle’ signed an agreement to stop these

practices and an independent audit commission was created to monitor its

compliances.

2. Coalition for environmentally responsible economies (CERES). This

seeks to engage with investors to promote corporate activities for a ‘safe

and sustainable future for our planet’. Organisation such as Greenpeace

are affiliated to CERES and pays particular attention to fishing industry.

3. Sullivan Principles. These principles were devised by the Reverend Leon

Sullivan, a Philadelphia minister, a black civil rights activist and board

member of General Motors. In 1977, he devised a set of principles that

requested companies to improve workplace and social condition for

blacks in South Africa during apartheid era.



6.6.5. Bribery and corruption

Two important international conventions and a US Act have required

member countries to criminalise transnational bribery:

1. Organisation of American States Inter-American Convention against

corruption (1994)

2. OECD convention on Combating bribery of Foreign Public Officials

(1999). By mid 2000 some 20 countries had already adopted such laws

with another 14 close enacting them.

3. US foreign corrupt practice Act 1977. This made certain payments to

foreign officials illegal even these officials are located abroad, with

penalties including prison, fines, and disqualification from doing business

with the US government.

6.7. Ecological/environmental issues

In an era of increasing governmental and popular concerns with issues such as global

warming and sustainability, international business must pay careful attention to the

ecological and environmental perspectives with regard to all aspects of their

operations.

6.7.1. National and global issues

The environment has become an increasingly important focus of national and

international policy makers as global warming, erosion of the ozone layer

and other environmental threats are linked with worldwide growth in the

emission of harmful substances.

Role of the Environment

According to Wall et al (2010, p.224) there are three roles of environment

1. Amenity Services: the natural environment provides consumer services to

domestic households in the form of living and recreational space, natural

beauty, and so on.

2. Natural resources: the natural environment is also the source of various

inputs into the production process such as mineral deposits, forests, water

resources, animal populations and so on.

3. Waste products: both production and consumption are activities that

generate waste products or residuals. For example, many productive



activities generate harmful by-products, which are discharged into

atmosphere or water courses.

Sustainable developments

When environment fails or unable to efficiently fulfil all three functions as the

economy grows over a period of time is called ‘unsustainable developments’

(Wall et al, 2010). The figure below highlights some of the sustainability risk

areas and their potential impacts on capital performance.

Source: Cullen and Parboteeah (2010, p. 311)

Figure 6.5: Sustainability risk areas and potential impact on investment

performance

The capacity of the economy to produce more products is constrained or

limited by the availability of natural resources. Even if the resources are

sufficient to permit economic growth, the extra production will simply ‘draw

through’ more materials and energy in products, which the environment must

ultimately assimilate, since matter and energy cannot be destroyed.

Therefore whenever possible materials must be recycled, renewable energy

sources must be used in preference to non-renewable sources and waste

emissions must be limited to the extent that the earth can safely absorb these

‘residuals’.



This approach has led many economists to propose limiting the human

demand for goods and services in order to attain a level of economic growth

that can be ‘sustained’ over future generations.

6.7.2. Business issues

Numbers of driving forces are raising environmental concerns.

1. Environmentally conscious consumers: Consumer awareness of

environmental issues is creating a market for ‘green’ products’.

‘Sustainable’ and ‘sustainability’ are now key trigger words in the world

of advertising for positive, emotive images associated with words such as

‘green’, wholesome’, ‘goodness’, ‘justice’ and ‘environment’ among

others. They are used sophisticatedly to sell cars, nappies, holidays and

even lifestyle.

When core activities and products have few direct environmental effects,

consumer demand maybe significantly influenced by environmental

implications of backward or forward linkage. For example, Shell petrol

sales were adversely affected in 1996 when Greenpeace alleged that

proposed disposal of Brent Spar oil platform (backward linkages) at sea

posed a serious threat to the marine environment.

Similarly, Asea Brown Boveri, a Swiss-based multinational received

extremely adverse publicity around the same time from environmental

groups protesting at its alleged destruction of Malaysian rainforest (Wall

et al, 2010).

Reinhardt (1999 cited in Wall et al, 2010, p. 226) suggested that three key

conditions are required for success with ‘environmental product

differentiation’

The company must have identified a distinct market segment

consisting of consumer who really are willing to pay more for

environmentally-friendly products

The branding/corporate image must clearly and credibly covey the

environmental benefit related to the products

The company must be able to protect itself from imitations for long

enough to profit from its ‘investment’ in the previous two

conditions.

2. Environmentally and cost conscious producers

Producers are increasingly aware that adherence to high environmental

standards need not to be at the expense of their cost base. This means that

producers can be environmentally friendly at the same time as reducing

their cost base.



For example, between 1975 and 1996 the multinational such as 3M,

reduced its waste released to environment by 1.4 billion pounds in weight

and at the same time saved over $750 million in cost. Similarly between

1992 and 1998 the multinational such as S.C. Johnson, reduced its waste

output by 420 million pounds in weight while saving over $125 millions.

3. Environmentally –and risk conscious producers

MNCs are increasingly aware that failure to manage environmental risk

factor effectively can lead to adverse publicity, lost revenue and profit

and perhaps even more seriously a reduction in their official credit rating

, making it more difficult and costly, (e.g. higher interest rates) to

finance future investment plants.

For example, TESCO has in the past received publicity as a result of a

TV documentary about the conditions for workers growing foodstuffs,

such as mangetout in Africa, which are exposed to the supermarket chain.

It has therefore established its own code of conduct and set up 70 strong

team of ethical advisers to help monitor the goods it sells in its stores.

4. Environmentally conscious government

Business have a further reason for considering the environmental impacts

of their activities, namely the scrutiny of host governments. Where

production of a product causes environmental damage, it is likely that this

will result in the imposition of taxes or regulations by the government.

6.7.3. Environmental codes and regulations

Some important environment-specific codes and regulations, which are

important to international business include

1. ISO 14001. The international Organisation for Standardization has developed

ISO 14001 as a means of certifying companies that adopt certain minimum

standards of environmental management

2. Regional Agreements. Bilateral investment agreements between nations (e.g.

Bolivia- USA bilateral investment treaty) often contain minimum

environmental standards as do broader based ‘regional’ treaties such as

NAFTA (North American Free Trade Agreement).

3. Multilateral Agreements. Various protocols have been agreed (e.g. Montreal,

Kyoto) as to reduction in greenhouse gas emissions etc.



6.7.4. Supporting environmentally friendly activities

Government normally impose heavy tax on negative environmental activities

while relaxed the tax levied on environmental friendly products or business

activities by giving subsidies or charging very low tax or giving tax

exemptions.

Rules and regulation are made to prevent using products that do not meet

certain environmental conditions.

6.8. Global warming, ‘carbon footprint’ and tradable permits

6.8.1. Global warming

Global warming refers to the trapping of heat between the earth’s surface and

gases in the atmosphere, especially carbon dioxide (CO2) (Wall et al, 2010,

p.231).

Currently some 6 billion tonnes of carbon dioxide are released into the

atmosphere each year, largely as a result of burning fossils fuels. In fact

carbon dioxide constitutes some 56% of these “greenhouse gases’, with

chlorofluorocarbons (CFC). CFC were mainly used in refrigerators, aerosols

and air-conditioning systems, accounting for a further 23% of such gases,

the rest being methane (14%) and nitrous oxide (7%). By trapping the sun’s

heat these gases are in turn raising global temperature (Global warming)

(Wall et al, 2010).

The importance of global warming and its association with CO2 emission has

become increasingly high profile in recent years. The increasing occurrence

of extreme weather conditions across many continents, and the

overwhelming collections of scientific evidence on the reality of global

warming has led to increasing pressure on individual and organisations to

reduce their ‘carbon footprint’ and demonstrate a responsible attitude to the

environment.

6.8.2. Carbon footprints and climate change

A carbon footprint is the total amount of greenhouse gas, expressed in terms

of equivalent amounts of carbon dioxide, for which an individual,

organization, product or event is responsible (Kane, 2010, p.50).

Carbon footprint is measured based on ‘greenhouse gas protocol’. Some of

the greenhouse gases include CO2, methane, Nitrous Oxide,

Hydrofluorocarbons etc.



Climate change is a long-term shift in the statistics of the weather (including

its averages). For example, it could show up as a change in climate normals

(expected average values for temperature and precipitation) for a given place

and time of year, from one decade to the next (NOAA, 2007).

The impact of climate change arise due to global warming has a significant

impact on water supply, water quality and demand for water. Due to the

scarcity of water, it impacts businesses. According to United Nations Global

Compact (2009, p. 5-6) highlighted some implication of climate change on

business organisations

1. Water scarcity directly affects business operations, raw material supply,

intermediate supply chain, and product use in a variety of ways. Declines

or disruptions in water supply can undermine industrial and

manufacturing operations where water is needed for production,

irrigation, material processing, cooling and/or washing and cleaning. For

example, information technology firms require vast amounts of ultra

clean.

2. Water quality risks are often overlooked but may have significant

financial implications. The quality of process water is critical in many

industrial production systems, and contaminated water supply may

require additional investment and operational costs for pre-treatment.

3. Water scarcity, changes in precipitation patterns, and glacier melt caused

by climate change directly affect power generation, curtailing hydro-

based power production, and also impacting any power plants that run

steam turbines. Whether fired by coal, natural gas, or nuclear energy,

electricity generation relies on having an adequate supply of cooling

water. Businesses that depend on highly reliable energy from these power

sources will be at risk.

4. Declines in water availability and quality can increase competition for

clean water. In water-scarce regions, tensions can arise between

businesses and local communities, particularly in developing countries

where local populations often lack access to safe and reliable drinking

water. For instance, in Kerala, India, opposition to beverage company

operations developed over concerns about the effects of bottling plants on

local groundwater levels and supplies. When villagers’ wells ran dry,

local government revoked company operating licenses, affecting both

revenues and company reputations.

5. Reputational risks increase as people become more aware of their rights

to access water. The concept of “access to clean water as a human right”

is gaining more recognition globally, yet the failure of governments to

provide 100 percent coverage for water services means that international

and local businesses may find themselves using copious amounts of water

in regions where people lack sufficient water to meet basic needs.

6. Water scarcity will increase water prices. Among other factors, water

scarcity is driving shifts toward full-cost pricing aimed at providing

economic incentives for efficient water use. In many places, artificially

low water prices are rising as subsidies are phased out. Utilities in

industrial countries are increasingly implementing “block” or “tiered



rates,” where water users pay more for increased consumption. These

tariff structures are specifically designed to encourage commercial and

industrial users to use water efficiently.

7. Water-intensive products and services face increased socio-political risks.

As water scarcity becomes a serious problem in many parts of the world,

there may be corollary pressure, both regulatory and reputational, on

products that require a significant quantity of water. Products and

services that require large amounts of water or energy to produce or to

use may be phased out by law, lose market share to less water-intensive

products, or cause reputational damage for the company.

6.8.3. Tradable permits

Trade permits are a market-based solution to the problem of pollution. With

this policy option the polluter is issued with a number of permits to emit a

specified amount of pollution. Polluters can buy and sell permits to each other,

at a price agreed between the two polluters. This means permits are

transferable.

The underlying principle of trade permits is that those firms which at present

find it either too difficult or too expensive to meet the standard set.

Some benefits of carbon trading permits include

1. Predictable carbon emissions

2. Fewer political obstacles than a tax

3. Revenue can be returned via rebates and/or used for public goods

4. Revenue rises as emissions decline

Some of the disadvantages associated with Carbon trading includes

1. Total emissions are capped, but the dollar price is unknown and dependent

on many market variables.

2. Depending on the scope, method of allocation, and other design elements,

too many permits may be issued, and other market imperfections may

arise.



Reference list

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http://www.unglobalcompact.org/docs/issues_doc/Environment/ceo_water_mandate/UNGC-PI_climate-water_whitepaper_FINAL.pdf

6.1. Introduction - FTMS

Documents

Transcript of 6.1. Introduction - FTMS